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Jul 10, 2019

Hot Topics: Dodd-Frank Act Hedging Policy Disclosures Begin

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Although final rules were published in December of 2018, July 1st marked the date that issuers (other than smaller reporting companies and emerging growth companies) must begin complying with the Dodd-Frank Act’s hedging policy disclosure rules.

Background

The final hedging disclosure rules require issuers to describe all practices or policies they have adopted regarding the ability of employees or directors to engage in financial transactions that hedge or offset any decrease in the market value of the issuer’s equity securities granted as compensation to, or otherwise held, directly or indirectly, by the employee or director. If an issuer does not have a hedging policy, that fact must also be disclosed. For additional details as to the requirements of the final rule, please see our client memo that was published at the time the final rule was promulgated in December 2018, New Year, New Rules: Arrival of the Final Hedging Disclosure Rules.

Pursuant to the final rule, issuers other than smaller reporting companies and emerging growth companies must include the disclosure in proxy and information statements with respect to the election of directors during fiscal years beginning on or after July 1, 2019. For smaller reporting companies and emerging growth companies, compliance is required for fiscal years beginning on or after July 1, 2020.

Our Thoughts

For many issuers, the new rules will likely have little impact. Pursuant to Shearman & Sterling’s 16th Annual Corporate Governance & Executive Compensation Survey, 93 of the top 100 companies already disclose an outright prohibition on hedging by their employees and directors.[1] However, issuers that have not yet made voluntary hedging policy disclosure, or have not yet adopted hedging policies, should be mindful of this new requirement and prepare for their next proxy statement that includes the election of directors.

As to the remaining executive compensation provisions of the Dodd-Frank Act, final rules with respect to clawback policies, pay vs. performance disclosure and incentive-based compensation at financial institutions are all viewed by the SEC as longer-term actions, and it remains to be seen when these final rules will be promulgated.

Footnotes

[1]   Our 17th Annual Corporate Governance & Executive Compensation Survey is scheduled for release in September.

Authors and Contributors

Richard Alsop

Partner

Capital Markets

+1 212 848 7333

+1 212 848 7333

New York

John J. Cannon III

Partner

Compensation, Governance & ERISA

+1 212 848 8159

+1 212 848 8159

New York

Doreen E. Lilienfeld

Partner

Compensation, Governance & ERISA

+1 212 848 7171

+1 212 848 7171

+1 650 838 3804

+1 650 838 3804

New York

Kenneth J. Laverriere

Partner

Compensation, Governance & ERISA

+1 212 848 8172

+1 212 848 8172

New York

Gillian Emmett Moldowan

Partner

Compensation, Governance & ERISA

+1 212 848 5356

+1 212 848 5356

New York

Lona Nallengara

Partner

Capital Markets

+1 212 848 8414

+1 212 848 8414

New York

Linda Rappaport

Of Counsel

Compensation, Governance & ERISA

+1 212 848 7004

+1 212 848 7004

New York

Matthew Behrens

Associate

Compensation, Governance & ERISA

+1 212 848 7045

+1 212 848 7045

New York